SCOTUS Considers Major Energy Case From Western Energy Crisis

The Western energy crisis in 2000 and 2001 is finally getting its day in court – the U.S. Supreme Court, to be specific.

On Monday, the Supreme Court heard oral arguments in Oneok vs. Learjet. The lawsuit was brought by industrial companies in several Western states that purchase large quantities of natural gas for direct use. The industrial plaintiffs claim that they overpaid for natural gas in 2000 and 2001 because market prices had been rigged by the ten gas pipeline companies named as defendants. At the time, the market price for natural gas was pegged to the prices reported in private indexes. By falsely inflating the price indices, natural gas sellers were able to charge buyers much higher prices for natural gas.

The plaintiffs are thus suing the pipeline companies for violating state antitrust laws. A federal district court judge said that the Natural Gas Act (NGA) prohibited them from doing so. The Ninth Circuit Court of Appeals reversed the district court, holding that the NGA did not prohibit the plaintiff’s lawsuit. As it always does, the Supreme Court will get the last word on the matter.

Here is the non-nutshell version of the legal issue: Does the NGA preempts state-law antitrust claims targeting industry practices that directly affect wholesale gas rates (which are regulated by the feds) when the claims arise from retail sales of natural gas (which are regulated by the states).

Putting aside the preemption jargon, the issue is really about where the boundaries should be drawn between retail and wholesale sales. And not just for the sale of natural gas. The sale of electricity will also be affected by the Court’s decision. The NGA, which governs interstate markets for natural gas, is commonly used as for interpreting similar provisions of the Federal Power Act (FPA), which governs interstate markets for electricity.

What is the difference between wholesale and retail sales? Until recently, wholesale buyers purchased natural gas for resale. They did not actually use the gas they purchased, but sold it to homeowners or businesses that used the gas for heating, cooking or whatever. For example, natural gas utilities buy natural gas from wholesale sellers for resale to its customers. When the utility buys gas from a wholesale seller, the sales rate it pays is regulated by federal energy regulators. In a retail sale, the buyer uses – rather than resells – any gas it purchases.

During oral arguments on Monday, Justice Stephen Breyer described a hypothetical that illustrated how the boundary between wholesale and retail sales has blurred in recent years. “[A gas pipeline company] picks up gas in the Permian Basin. It ships it up to Ohio. It sells it to a retail distributor in Toledo,” said Justice Breyer. “FERC regulates the sale for resale, and the local regulator regulates the price to the distributor.”

But what if the same pipeline company selling gas from Texas for resale in Toledo also sells gas for direct use to a manufacturer in in Toledo. The latter type of direct sale from a pipeline company to an end user “used to be a bizarre and unusual occurrence,” according to Breyer. It is as common now as it was uncommon 20 years ago. It is also where federal and state authority of energy sales overlaps.